Startups vs. Investors: The Silver Lining of Competition

When it comes to competition, there are 2 essential truths I see every day:

Investors are obsessed with competition (and the lack of it).

Founders are undereducated about their competition and painfully unable to “sell it” to their advantage.

This is a scenario you, a fresh startupper, never want to experience. Your beloved product, a fruit of hundreds of hours of (not only) your (not only) labor finally sees the light of the day, only to find that the color of that light is red. The reason? Crowded market, they say. Who’s to blame? Is your product offer insufficient, or are the investors shortsighted and overly obsessive over competition?

The reality is that both statements are correct, but it’s really only the investors’ opinion which matters in the funding process; and you, beloved startupper, need to adjust you communication accordingly. How to do this? Let me start by examining some basic perceptions.

The Investor’s Argument (The Dark Cloud)

The investors (Angels, VCs, Scrooge McDuck, whoever) have a perfectly sound reason to obsess over rival companies with similar offering. Competitive landscape very much defines and frames the possible success of your product. That, in turn, determines all the variables of the fundraising process.

This is all common sense, but let me do a simple recap. In the mind of a common investor, every market has a certain size, which adds up to the sum of (by default yearly) revenues that the market players are fighting for. Existing competitive offerings translate into division of this pie among a variety of hungry companies that want the largest possible piece for themselves. A product entering a competitive market will thus have rivals that will probably be older, bigger, with established brands and an existing customer base, which is difficult/costly to steal. The more crowded a market is, the more difficult it is to differentiate and to dominate.

These are simple, yet relevant and dangerous arguments, and you, a founder negotiating funding, need to address them. What happens if you are in a competitive market, just like most startups are, and you don’t? In the better case, the investors will fund your endeavor, but your valuation/capital raised/combination of the two might get a haircut. In the worst case, the investor will consider your market too saturated and will pass on the investment. Simply said, if you don’t manage the investors’ perception of your competitive landscape, you’re letting their minds wander exactly where you don’t want them to wander. All of a sudden, the future of your project may appear in an existential risk.

Competition as Seen by Founders in CEE

Before turning to answers to those pertinent questions, let me spend a paragraph on an interesting local phenomenon. The startup ecosystem in CEE (Central+Eastern Europe), where we, Credo Ventures, operate, is different from most of its global counterparts. When it comes to competition, it’s not rare for a local startup to be borderline paranoid that the investor is going to steal its game-changing idea and become a competitor himself. In my short time in this industry, I’ve read a number of business plans with the name of the company deliberately scrambled; or, even better, with the product and/or the business model not even directly described. It usually goes like this:

Dear entrepreneurs… Firstly, I guarantee you that if you present yourself like this, you’ll never get funded. Never. Secondly, have you ever heard about an investor in CEE who snatched a startup idea and made millions? Me neither. Thirdly, if your product can be copied so easily (only by throwing cash in the right direction), perhaps you should re-think if your idea is good enough in the first place. Building a business around something that only needs cash to be copied is hardly a sound strategy.

Enough for local, let’s resume the search for the silver lining.

The Founder’s Counter-argument (the Silver Lining)

So you, a young startup, find yourself in a competitive market. That’s very standard, most startups are. Now the true challenge is “selling” the existing competition to your advantage. Rather than giving you tips on visual presentation of your competitive landscape, I’m instead focusing on understanding competition for what it might be and what it really is. Here are a few how-to suggestions:

Win a segment – win the market

Investors look for winners. Are you planning on taking your entire market by surprise, making millions by triumphantly capturing 5% market share? After all, even though there are tens of competitors in this market, it’s still big enough for me, isn’t it? Wrong. A statement like this really means only two things: firstly, this guy is defocused, and does not have a deep understanding of his market. Secondly, this is not how winners speak. An ambitious entrepreneur, one that investors love, is in it to win. He knows that, in 99% of cases his product is not revolutionary enough to swipe down the entire market at once.

Therefore, he’ll firstly break down the market into segments, and then attack the segment with little or no competition where he can win, dominate, be the number one. From that segment, he’ll then springboard to other segments, dominating the whole market one segment at a time. This will all be a part of his strategy, neatly planned, communicated and aided by a nicely-looking timeline. Every dominated segment is a milestone of its own, and brings its own set of goals. The management and the team is unified and focused on achieving these goals, step by step. This is how realistic winners plan and this is how they present themselves to the investors. When planning your strategy, and when presenting your startup to the investors, break you market and your competitors down into segments, and take them down one by one in a focused effort.

Competition as a proof of concept

The nature of competition is, to your advantage, ambiguous. Yes, competition cuts the market pie into pieces, leaving you with a fraction of the whole; however, it also means, and this is the punch line, that there actually IS a pie to eat. It means that a product similar to yours has been offered to the market, and the market liked what it saw and was willing to pay for it. Therefore, to some extent, existing competition is your proof of product/market fit. It’s a fundamental proof that the market which you are about to enter actually works. Most investors do not think of competition in this way, so it’s your responsibility to guide their thinking in this direction. This is not a winning argument, but it is a helpful one.

The investor’s portfolio

Vast majority of investors have existing portfolios of companies, and this portfolio is publicly available on their web or on sites such as Crunchbase, AngelList, etc. Familiarize yourself with the portfolio of investors you deem attractive, for three reasons.

First, they may have already invested into a company competing directly or indirectly with yours. It would therefore be very counter-productive for them to invest into you, and you’ll have a tough time convincing them to do so.

Second, investors often publicize their investments. This means that you can see how much they tend to invest into companies in your stage in similar sectors, and whether your ‘ask’ is in their usual ballpark or not. In other words, related and competing companies give your startup a benchmark for funding.

Third, once an investor has a considerable portfolio of companies, he may start looking to acquire a startup to help his existing portfolio to thrive. There is a plethora of complementary products on the market, and unusual synergies (often from entirely different markets) can often produce something unique and powerful.

Acquisitions

Many young entrepreneurs do not realize this when starting up their companies, but plenty of startups are acquired within the first few years of their existence by their bigger (direct or indirect) competitors because of their technology, market share, revenues or the team. What’s more, an acquisition is the most common exit for an institutional investor; it is how they get their investment back, hopefully at a lofty premium. There are virtually no startups counting on this option, and I’d never advocate it as a unique selling proposition – don’t let the investors think that you’re starting your business just to get acquired as soon as possible (and, of course, please don’t start your business with this mindset).

However, if you’re crafty enough, you can lead them to realize this multiple-return opportunity themselves, without being too explicit. Yes, it may sound like a dirty trick, but an entrepreneur who is aggressive enough to pull this off is, in my view, truly committed to succeeding.

If you want to pursue this strategy, don’t let the investors search for these acquisition opportunities on their own. Do your homework, research your competitors and their M&A history, and look for acquisition opportunities. You are bound to find something. Keep in mind that getting funded based on glamorous acquisitions prospects doesn’t mean that there actually will be an acquisition. As long as you have the decisive ownership share, it’s always your call.

Conclusion

These suggestions are not even close to a one size fits all guide, and there are certainly exceptions and counter-arguments to every one of them. However, my ambition was merely to inspire you to think about how you are presenting your competitive landscape to the investors, and to do so creatively.

When you find yourself in front of a potential investor, you have two options: you can either do what most founders do and let the existing competition diminish your value, or you can be proactive, do you homework diligently, and win with the cards you were dealt.

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Oliver Petrus

Oliver Petrus studies Business Administration at the Anglo-American University in Prague, Czech Republic. Despite of his major in Strategic Marketing, it is the exciting world of venture capital that brought him to Credo Ventures. In his free time, Oliver enjoys just the right mixture of watching / listening / playing / reading whatever interests him at a given moment.